4 reasons using a personal loan to pay off your credit card is a bad idea

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Should one debt be exchanged for another?


Key points

  • Personal loans are an easy way to borrow money for any purpose, including paying off credit card debt.
  • You could run into trouble with high interest rates, fees, and put your home or car at risk by getting a personal loan.
  • You can make getting out of debt easier by choosing a repayment technique, increasing your income, and honestly assessing your spending habits.

Personal loans are a way to borrow money that can be used for any purpose. This differentiates them from a mortgage or car loan, which must be used to purchase a house or a car, respectively. Getting a personal loan is quite simple and involves choosing a lender based on the interest rates available (your credit score has an impact on the rates you will be offered, with the lowest interest rates going to borrowers with better credit scores), complete an application, undergo a credit check, get approved, receive your loan money, and repay the loan over months or years, with interest.

Interest rates on personal loans can be lower than you would get with a credit card, so if you’re struggling with credit card debt, you may be wondering if you should take out a personal loan. debt consolidation to get out of it. Is it a good financial move to make? Here are a few reasons why you might want to think twice.

1. You can’t get a lower interest rate

If you’re struggling with bad credit on top of your card balances, you may not qualify for a low interest rate. There are lenders that cater to those with less than stellar credit, but you will pay a higher interest rate than if you had good or excellent credit. Depending on the interest rate attached to the credit card(s) you’re trying to pay off, you might not get a personal loan. One way to ensure you get the best deal possible, even with a lower score, is to shop around with multiple personal lenders. Many offer loan pre-approval, so you can get an idea of ​​what terms you’ll qualify for before you get started.

Discover: These personal loans are the best for debt consolidation

More: Prequalify for a personal loan without affecting your credit score

Another issue you may face with using a personal loan to pay off credit card debt is the added fees. Some lenders may ask you to pay an origination fee for the loan, often equal to 1% to 8% of the total amount you borrow. Other charges you may face may include a loan prepayment penalty, processing fees, and if you are late with a payment, you may also incur late fees.

3. Secured loans can be risky

If you cannot qualify for an unsecured personal loan, you may need to take out a secured loan. These sometimes come with lower interest rates, but that’s because you’re risking collateral, like your house, car, or other valuables, that will be seized by the lender if you don’t. not refund. It’s a route you could take if you can’t get a loan otherwise, but providing collateral adds another layer of potential problems to using a loan to pay off credit cards.

4. It may not solve your spending problem

This last reason is important. If you can get approved for an unsecured personal loan at a reasonable interest rate, you’ll save money on paying off your credit card debt. But unless you really want to dig deeper and get to the root of your spending problem, this won’t solve it. Let’s say you get the loan, pay off the credit cards, and run into trouble again – this time with $0 starting balances on all those credit cards.

Eliminating the credit card temptation altogether may seem like the safest route, but closing your cards once they’ve been paid off is often not a good idea. Closing unused cards will negatively impact your credit score by reducing your total available credit limit and reducing the average age of your account.

In the end, only you know yourself. If you pay off your cards with a loan, can you avoid topping them up again and ending up in an even deeper hole than before? If the answer is no or you’re not sure, a personal loan to pay off your credit cards may not be the best solution for you.

Alternatives to debt repayment

I got out of credit card debt myself this year, without using a personal loan. There are several ways to approach debt repayment. I relied on the debt snowball method, where you first invest more money into paying off your smaller balances, then move on to the next balance. By the time you reach your highest balance, all the money you put on your other credit cards goes towards that final balance. Another debt repayment method with a similar concept is called the debt avalanche method, in which you focus on paying off your highest-interest debt first. This way you will save money, but it may not be as psychologically satisfying as snowballing your debt. Watching your debts snowball away can be very motivating.

Many well-meaning people will tell you that you can just budget your money troubles, but that’s assuming you make enough money to start with. Evaluate your expenses against your income to determine your own situation, but you’ll probably find it will be more productive for paying off your debt if you can bring in some extra cash, perhaps by getting a hustle or a job. better paid full time. (or both).

Paying off debts is difficult. It’s hard to be honest with yourself about your finances, but I can tell you that the rewards (both financial and emotional) are huge. Getting a personal loan to help with your credit card debt might be a good fit for you, but be sure to consider all of the above angles before making a sure decision. Good luck – I’m rooting for you.

The Ascent’s Best Personal Loans for 2022

Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.

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